Zulily saved, but other hot IPOs still in trouble

Published Mon, Aug 17 20158:00 AM EDTUpdated Mon, Aug 17 20159:00 AM EDT

Shares of chicken restaurant chain El Pollo Loco traded down 21 percent on Friday as the company reported disappointing same-store sales and provided a weak outlook. El Pollo Loco is one of many recent initial public offering high fliers down significantly this year, with returns ranging from negative 20 to 50 percent. Also, the Renaissance Capital IPO index, which tracks the performance of companies that went public in the last two years and counts stocks such as Twitter , Alibaba and Hilton among its top holdings, is about to turn negative year to date. One savior for these struggling new companies could be a takeover after zulily , an online retailer which went public in late 2013, was acquired by John Malone's Liberty Interactive on Monday for $2.4 billion. But zulily, whose shares lost nearly half their value this year before the takeover, may be the exception to the rule as most investors believe the trend will be lower for these broken IPOs. "What we have seen is a deluge of IPOs that have attracted very heavy retail investor interest. The pattern that emerges time and again is a very strong price appreciation in a short period after the IPO, followed by a long decline as the underlying fundamentals of these companies take over," said Nick Mazing, portfolio manager of Ampera Capital. Shares of El Pollo Loco, off 60 percent from their high, is a perfect example, he said. "El Pollo Loco IPO-ed straight into the California minimum wage increases and now has four consecutive quarters of worsening traffic in the face of price increases," he said. He is not interested in any of the beaten-down IPOs, even at today's lower prices. "Just because the stock price drops from the highs does not mean these are good buys. Many of these recent IPOs have fundamental business challenges that they need to work through," he said. Some other analysts agree and call out the risk in frothy IPOs. "The problem with IPOs is that investors struggle to differentiate marketing spin from investment fundamentals. It is during these times that investors end up playing some form of the 'greater fool' theory, hoping that there are others willing to buy highly priced, future focused shares at big multiples," said Chris Bailey of Financial Orbit, a U.K.-based investment research firm. Read More Citi: Currency war to hit these China plays Bailey also thinks weakness in recent IPOs performance may hit the general market: "Fear and greed are always prevalent in financial markets, and the fading sentiment towards highly valued IPOs can spill over into the wider market," he said. "Today such a tricky transitional period with negative spillovers for the wider market is perfectly plausible."

An El Pollo Loco restaurant in Lake Forest, California

Scott Mlyn | CNBC

Shares of chicken restaurant chain El Pollo Loco traded down 21 percent on Friday as the company reported disappointing same-store sales and provided a weak outlook.

El Pollo Loco is one of many recent initial public offering high fliers down significantly this year, with returns ranging from negative 20 to 50 percent.

Also, the Renaissance Capital IPO index, which tracks the performance of companies that went public in the last two years and counts stocks such as Twitter, Alibaba and Hilton among its top holdings, is about to turn negative year to date.

One savior for these struggling new companies could be a takeover after zulily, an online retailer which went public in late 2013, was acquired by John Malone's Liberty Interactive on Monday for $2.4 billion.

But zulily, whose shares lost nearly half their value this year before the takeover, may be the exception to the rule as most investors believe the trend will be lower for these broken IPOs.